Analyze Me!

February 08, 2011

FT: Lex - Egypt

Egypt

Intense political protests could help make Egypt a splendid growth market. But sadly, that is not the most likely outcome.

Although Egypt has been making decent progress – gross domestic product has risen at a 5.5 per cent rate since 2003 – it still has many characteristics that were once called Third World: a tiny and very rich elite, a small middle class and ill-educated masses (almost 30 per cent of the population is illiterate). A dictatorial government uses repression and subsidies to keep the peace. One result: the fiscal deficit and total government debt are high at 8 and 72 per cent of GDP respectively.

Investors, including foreigners, have happily downplayed the structural difficulties and the 11 per cent inflation rate. Encouraged by the presence of a pro-market finance minister, Youssef Boutros-Ghali, they have funded much of the fiscal deficit and pushed the stock market up almost 10-fold since 2003. Several emerging market strategists included Egypt, with its 80m people and developing business culture, on their lists of next-generation growth tigers.

If the most sophisticated protesters have their way, the current disruption could feed the tiger by ushering in a more dynamic regime. But street movements that start in hope often end in repression or, if they are successful, in civil disorder. Those that end well – such as in eastern Europe – do not suffer from sectarianism, and are aided by a democratic tradition. Neither condition applies to Egypt.

Also, the economic approach of what appears to be the best organised opposition group, the Muslim Brotherhood, is unknown. The 18 per cent drop in the Egyptian stock market over the last 10 days, including an 11 per cent fall on Thursday, looks sensible. The autocratic regimes of Tunisia and Egypt were never economic wonder-workers. But their successors could still be worse.